One reason that the discussion of de-dollarization is a bit overdone is because of the structure of global financial markets and the overnight liquidity needs among the global systemically important banks as well as other financial intermediaries.
Serving these liquidity needs is the $12 trillion American repurchase, or repo, market, which settles in U.S. dollars.
Think of it as the modern version of what the French in the postwar era called American exorbitant privilege.
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The U.S. repo market consists of short-term collateralized borrowing and lending, with dealers often taking simultaneous positions in either side of separate transactions.
The repo desk at the Federal Reserve Bank of New York is charged with facilitating monetary policy by keeping overnight rates within the range announced by the Federal Open Market Committee, and maintaining liquidity in the short-term money markets in times of financial stress.
Yes, there will be moves away from the holding of dollar-denominated assets as some economies choose to de-link from American monetary dominance. But the euro, yuan, pound and yen simply do not have the adequate depth or breadth to support the liquidity needs of the global systematically important banks and other large financial intermediaries.
Any idea around de-dollarization in the near to medium term should be discounted given the dollar’s deep structural foundation in the world’s financial system. For now, there simply is no alternative to the dollar.
